Plato Partnership at TradeTech 2018 – How is the shift to Large-in-Scale (LIS) impacting liquidity and what influence will this have on trading strategies?

Wednesday, 25th April 2018. 1145 – 1225.

This panel – featuring representatives from JPMorgan, the FCA and Union Investments – looked at how dark pool caps will impact FTSE companies and the type of trading performed, what new block solutions are on the market, and how they are executing new order types.

Key Takeaways

The introduction of MiFID II has seen a spike in LIS trading, particularly following the delayed implementation of the dark pool double volume caps. This is a trend that has been occurring for the past few years, not just post-MiFID II.

Market complexity has significantly increased but buy-side traders have embraced the new market landscape, with some saying that it is now the “optimal trading environment” and that these trends are clearly in favour of asset managers.

Regulators, such as the FCA, will continue to monitor the progress of large in scale trading and the overall market, but must take a more holistic approach than they have previously to ensure MiFID II is having its anticipated effect.

Europe is still behind the US for LIS platforms, but market participants agree that more will come to market soon.

Key Questions and Quotes

Let’s start with a recap of the market so far:

“The statistics speak for themselves. Last year – 5% was LIS, it’s now 20%. LIS has tripled since Q1.”

“As soon as the dark caps came into place the percentage we traded with cash desks dropped 30%, while electronic desks increased 30%. If we look at cross venues, the percentage traded in the UK to Europe increased by 50%.”

“It’s clearly not a trend which started with MiFID II, it’s a phenomenon which we’ve seen over the last 2 or 3 years. Initiatives like Turquoise Plato have also increased the attractiveness of the whole trading landscape.”

What’s been your experience since double volume caps were implemented?

“We’ve caught up a lot with the US, though there are still some asset managers that aren’t connected to these pools.”

“We don’t think that further market fragmentation is going to help the market – how would this be efficient?”

Are you worried about unintended consequences of a move to LIS?

“Not at all. From our perspective, it’s an optimal environment. We want to deliver the best execution rate, lower the implicit trading cost, make sure that we have as little information in the pitch as possible and a variety of trading types with higher volumes. This ecosystem will hopefully remain sustainable.”

“Something regulators need to do is look more holistically at the trading system. Historically we would have a group looking at conduct issues, and then on the other side are transparency issues. What MiFID II does is to smash those two together. In some ways, the industry is ahead of the regulators.”

There’s been a discussion about periodic auctions – how does this impact you?

“There’s no ‘one size fits all’. We like the periodic auctions, especially considering their low toxicity. Liquidity is lower here than in other markets, but they’re a great tool to have.”

“One interesting aspect of the growth of LIS is that some asset managers think it’s worth waiting for a block. Once you get a critical mass for low-urgency orders, asset managers are happy to wait for the correct block to come along.”

How are you handling TCA in this new world? Are things becoming more complex?

“It is more complex, but we’ve put a lot of time, resource and effort to ensure we’re in a good place.”

“The tools you need for best execution are going to develop. Best execution is no longer a static ‘thing’ – it’s a process where you have to understand outliers.”

For the rest of 2018, what’s it going to look like in terms of the rest of the business?

“More initiatives are coming to the market from LIS trades. I’m sure there will be more innovation in the way we trade blocks and measuring the execution quality of them.”

“More competition. Competition is a good thing – it has altered the large in scale markets. There is a real opportunity to develop the large in scale markets.”